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The dynamics of frequent flier and other loyalty programs are changing on several fronts. For airlines, the recent changes have caused their strategic control over the programs to be in danger of slipping into the hands of credit card companies that serve as intermediaries between airline and customer.”

– Oliver Wyman
The New Economics of Loyalty Programs

Customers want options. The key to a successful loyalty program is finding a way to make your organization the option the customer chooses.

Sounds simple enough. But consider how the airline industry is struggling with “the loyalty question,” finding itself pitted against former marketing partners in the credit-card and other industries.

Airlines have made billions by providing choices to flyers:

When would you like to leave?

Do you want 1st Class or Coach? Business? Economy? …

Would you like to book 60 days in advance for discount pricing?

Shall I log this trip to your Frequent Flyer account?

It hardly seems fair that the airlines – who after all pioneered the modern loyalty program with choices offered through their 1980s air-miles programs – are falling victim to such challenges. Certainly, air travel has hit on hard times – like the passenger-bus industry before it, travelers no longer view a jet-plane ride as a luxury or a novelty.

And now, customers who spend on hotel rooms, car rentals – even books, foods and sporting events – all are addicted to the same basic loyalty model. It seems, however, that the addiction is less habit forming these days … just think of how many times you’ve discarded the last $3.23 of a $25 gift card, or let a BOGO expiration date pass without a thought.

Frequent flier and other loyalty programs are evolving rapidly,” writes Oliver Wyman in a White Paper, The New Economics of Loyalty Programs.

“To exploit the new economics of loyalty programs, companies must balance the competing objectives of driving repeat purchases and generating cash from partners,” Wyman says. “The key is to think of a program’s rewards as a currency and tailor that currency for the most profitable customers.”

Problem is, customers may be more ready to invest their “loyalty capital” in the credit card companies that facilitate their travel purchases.
Out of some 2 trillion airline miles awarded, only about 500 billion, or 25%, have been redeemed. But a whopping 81% of respondents to a recentWebFlyer survey agreed that “loyalty programs have gotten worse in rewarding loyal customers over the past 25 years.” And, fully 93% view loyalty programs as “primarily a marketing tool” that doesn’t really serve loyal customers.

So, given that paradigm, how do you refine your loyalty program to ensure that it keeps pace with the shifting sands of today’s marketplace?

First, find out who your customers are, and relate to their wants and needs. Look at your customer and contact databases, analyze customer purchase behavior to identify trends and changes in purchase behavior. Typically companies monitor customer satisfaction and attrition, but the telltale sign of a problem is changes in customer value over time — customer value migration. Customer value migration is a powerful indicator of changes in customer allegance. You may well find that your “best” customer has changed over the last two, five or ten years. That means you have to change as well.

Second, ask customers what they want. While some customers are moved by price, lifestyle, convenience and personal recognition are important factors in customer loyalty for many others. By understanding your customer’s attitudes, behavioral drivers and needs, you can ensure that your program pushes the most appropriate levers to help you build profitable, long-term customer relationships.

Finally, take action that all of us seem to regard as an underutilized luxury: Think. With today’s economy, have the business objectives for your loyalty program changed? What do you want to achieve? What do customers like about the current program? What has worked for you? What can be better? How will you measure success? Think about how YOU would feel if you were in your buyers’ shoes. Would you value discounting? Better customer service? Are you meeting your customers “where they are” in the customer relationship?

It’s hard to think of loyalty programs as a dinosaur – like the passenger-bus industry supplanted by the airlines in the last half of the 20th century … or like the airlines will, inevitably, be phased out in favor of some new public fancy.

But unless your loyalty programs change with the times, they’ll grow useless and extinct more quickly than you can imagine.